INDONESIA DIGEST Indonesia's complex Issues in a Nutshell By: Ms. Wuryasuti Sunario Published by: TBSC-Strategic Communication No.: 32.06 - Dated: 13 September 2006 In this issue:
MAIN FEATURE: ECONOMIC CAPACITY TO ABSORB LABOUR AT LOWEST EBB DESPITE GROWTH NEWS AND BACKGROUND: 1. Tourism and Transportation: Tourism Inflow Contribution to Balance of Payment Down, Outflow up Bali now a Destination for Malaysians Studying Medicine 2. Politics and Security Supreme Court passes Death Sentence to Six of "Bali Nine" --------------------------------------------------------------------------------------------- MAIN FEATURE: ECONOMIC CAPACITY TO ABSORB LABOUR AT LOWEST EBB DESPITE GROWTH Indonesia's capacity to provide employment in 2006 is at its lowest level compared to the past 10 years as labour-intensive industries are declining, reports Kompas daily. Quoting Deputy Minister for National Development, Bambang Widianto, the article mentions that today, the capacity of the real sector to absorb new employees is at a low 42,000 people with every one percent economic growth. In 2001, this figure was 253,000 and in 2003 it was 248,000 persons per percentage growth. In 1994, when Indonesia's economy grew at 7.57% rate, the real sector could provide 370,000 new jobs per one percent growth. Explaining this phenomenon, Bambang Widianto explained that at a relatively high rate of growth, the economy can absorb higher numbers of new labour per percentage growth, as compared to a relatively low growth, that we have today. During low growth, the private sector will cut costs, and reduce the number of labour employed. Before the economic crisis, Indonesia's economy grew between 7 to 8 percent, while post crisis, economic growth slowed down to between 3.83% to 5.7%. Correspondingly, prior to the crisis, Indonesia's industry grew by around 11%, peaking in 1994 by 13.52%.However, post-crisis industrial sector growth slowed down to between 3.6% to 7.5% per annum. In the past, Indonesia's absorption capacity of new labour force has never stood lower than 100,000 per percentage growth, however today this has dropped to 42,000 only. Strangely enough, if in the past, each year 1.5 million to 2 million new job seekers entered the market, this year, this number has also dropped to around 500, 000 only, which may mean that more people continue with studies, and/or do not seek jobs. Separately, Kompas reports, that Adviser to the Coordinating Minister for the Economy, Mohamad Ikhsan explained that changes in the composition of the manufacturing industry has also changed trends, since capital intensive industries are increasing, while the number of labour intensive industries are declining. For this reason, it is important to accelerate improvements in productivity and in the investment climate. Meanwhile, awaiting the enactment of the revised Labour Law, labour-intensive industries will wait out. In the interim, the government has launched the national program on community empowerment. Government's Community Empowering Program This Community Empowering program is explained by the Jakarta Post. The paper reports that the Indonesian government is seeking to create jobs for 15 million people over the next three years as part of an expanded poverty alleviation campaign. The government would prioritize two programs to reach that goal: namely people empowerment and the biofuel program, reported The Jakarta Post. Coordinating Minister for the People's Welfare Aburizal Bakrie claimed that the people empowering program has actually been operational since 1998 in 34,200 villages across the country. The program is expected to generate jobs for 12.5 million people, assuming that each project will absorb 250 people in a specific area during three years, said Minister Aburizal. "The projects are effective, but we need to expand them to 50,000 more villages by 2009," he said after last week's cabinet meeting "While, the types of projects will be determined based on local conditions. "The remaining 2.5 million jobs are expected to come on line as the government opens plantations to support its biofuel program. Critics have called the anti-poverty projects ineffective, pointing to the steady rise in the number of poor people over the past few years. But Aburizal said that without the programs, poverty would have been even worse. "We hope that the coordination between the relevant Cabinet ministers can be better. We have agreed that 20 percent of the total state budget allocated for poverty alleviation will go to these two programs," he said. The government has increased next year's poverty alleviation budget to 51 trillion rupiah (US$5.6 billion), from 43 trillion rupiah (US$4.7 billion) in 2006.(quoted from English.eastday.com from Shanghai) Indonesia's Growing Balloon Economy In this context, it is interesting to read the article in Kompas entitled :"The Balloon Economy", written by Prasetyantoko, now studying at the University of Lyon, France. According to Prasetyantoko, when an economy grows, but does not generate employment, this is caused by an overactive financial sector that develops out of proportion compared to the real sector. Especially, when the financial sector grows whereas its function of intermediation stalls. Thus we see that after the economic crisis, Indonesia's financial sector tends to dominate in line with global trends. Globally, since the 1980's, the global financial sector has experienced revolutionary growth, as new investment instruments were introduced. However, amidst the collapse of the real sector, the rapid growth of the financial sector will create a so-called "balloon economy". Prasetyantoko continues, The Economist magazine in 2005 noted that between 2003-2005, the world equity market grew by an astounding 60%, and when calculated for the period of the past ten years, then this means a phenomenal growth of 3,000 percent. In today's global liberal economy, experts warn that a crisis in the exchange rate will often trigger a crisis in the banking sector, thus causing a twin crisis. In Indonesia, the causality between the liberalization of the financial sector and the pursuant economic crisis is very evident. Due to the over-exposure of Indonesia's financial system to the global system, Indonesia's financial liberalization was followed by a severe crisis. For, even after ten years, its effects are still felt on Indonesia's investment capacity, economic growth and absorption of labour that have not recovered until today. Worst still, new regulations have not been replaced and enforced through poor governance. Another manner on how experts detect the growth of a balloon economy is by comparing the growth of tradable sectors to non-tradable sectors. Tornell and Westermann (2002) explained that during good times when credit lending is booming, the non-tradable sector will grow faster than the tradable sector. In Indonesia, however, says Prasetyantoko, there exists an imbalance (asymmetric financing opportunity) between the two sectors, when measuring cash flow against the level of corporate investments. Data reveal that prior to the crisis, the tradable sectors had larger financing constraints compared to the non-tradable sector, since loans tended to be given to non-tradable rather than to tradable sectors. Nonetheless, after the crisis, it appears from data available, that the property sector, which is non-tradable, continued to enjoy growth. These are indications, therefore, that after the crisis, the Indonesian economy continues to grow further away from the real sector. World Bank data further reveal that in 2004, Indonesia's tradable sector grew by 2.9%, while the non-tradable sectors grew at 7.2%. In 2005, this ratio widened to 3.5% and 8% respectively. On the other hand, agriculture (which is tradable) grew by 2.1% only in 2004 and 2.5% in 2005. It is clear, therefore, that Indonesia's tradable sector lags further and further behind the non-tradable sector. Meanwhile, in 2006 median percentage growth of trading at Jakarta's Stock Exchange neared 3.3%, which is the highest in the region, compared to Malaysia's 1.4% growth, Thailand's 2% and Korea's 2.1%. These data show that while Indonesia's financial sector is growing at a fast rate, the real sector is nearing collapse. Therefore, Indonesia must be forewarned that it should not grow further into a balloon economy, warns Prasetyantoko. (Sources: Kompas , 5 and 12 September 2006) (Tuti Sunario) ------------------------------------------------------------------------------------------- NEWS AND BACKGROUND: 1. Tourism and Transportation: Tourism Inflow Contribution to Balance of Payment Down, Outflow up International Tourism contribution to Indonesia's balance of payments this year is expected to decline to 2.7% in 2006 , down from 3.2% in 2005, which is caused by a number of natural disasters suffered by Indonesia in the past months, and the threat of bird flu, said Jeffrey Kairupan, Bureau Chief of the Economic Statistics Directorate of Bank Indonesia. On the other hand, travel outflow is estimated to increase to 2.4% from 2.3% last year, reports Bisnis Indonesia. Jeffrey further explains that travel inflow comprises earnings from all expenditures made by visitors during their stay in Indonesia, whether for tourism, business or other personal purposes, comprising hotel accommodation, tours, souvenirs and transportation. Whereas, travel outflow includes total expenditures made by Indonesians traveling abroad for tourism purposes and haj pilgrimage to Mecca. In 2005, real income from tourists to Indonesia totaled US$ 4.5 billion, while outbound Indonesians spent a total of US$ 3.5 billion in foreign currency overseas. Jeffrey Kairupan further explained that travel inflow contribution in the first quarter of 2006 was US$924 million and US$1.129 billion in the second quarter. And with expected contributions of US$ 1.307 billion and US$ 1.160 billion in the third and fourth quarter respectively, receipts from the tourism sector in 2006 could remain level at US$ 4.5 billion, reports Bisnis Indonesia. Bali now a Destination for Malaysian Studying Medicine Bali has unexpectedly drawn a new market segment. Malaysia's Bernama reports that Bali's Udayana has become a choice university for Malaysians to further their tertiary studies. Already there are 123 Malaysian students at the Udayana University including 50 who arrived just a few days ago to start their first lecture Monday (11 September) , reported Bernama. Except one student studying Hindu theology in this Hindu-dominated island, all are studying medicine. A Malaysian bank officer from Bangi, V. Sreenivasan, who has a daughter, Deepa, studying medicine here told Bernama recently that he chose Bali because the education cost and living expenses here were relatively cheaper compared to Europe, the US, Australia and even India, which has been the traditional destination for many Malaysian medical students. Secondly, he said, Bali was just slightly over two hours' flight from Kuala Lumpur, which made it easy and cheaper for parents to visit their children or when the children need to return to Malaysia. More importantly for Sreenivasan and other parents, and probably for sponsors like Mara and the Public Service Department too, the quality of education, the teaching and learning systems at Udayana University are as good as any other Malaysian government accredited overseas universities. As for the cost factor, Higher Education Minister Datuk Mustapa Mohamed, while in Jakarta recently, agreed that it was much cheaper to send Malaysian students for medical studies in Indonesia. No figures were given but it is understood that for one student sent to Europe or the US to study medicine, the government can send seven here at the same cost. That could be one of the reasons that Mustapa had enquired during his meetings in Jakarta with several universities whether it was possible for all 13 Malaysian-accredited universities in Indonesia to accommodate more Malaysian medical students, reports Bernama. And, through persistent and personal contacts of Malaysian ambassador to Indonesia Datuk Zainal Abidin Mohamed Zain, a number of those universities had allocated more seats to Malaysian medical students from this year onwards. Zainal Abidin told Bernama recently that the cost factor was one reason while the other was the relevance of their studies here for Malaysia, especially when they learn about the same kind of diseases prevalent in Malaysia and Indonesia, both being close neighbours. Meanwhile, the Bali branch president of the National Association of Malaysian Students in Indonesia, M. Sujatharan, said another factor preferred by Indian parents was the strict Hinduism practiced and observed in Bali. It is not surprising as 93.2 per cent of Balinese out of some 3.22 million population (2002 statistics) on the island is mostly of the Hindu faith while Muslims make up some 4.9 per cent and other religions, less than 2 per cent. However, not just Malaysians of Hindu faith or Indian origin are studying medicine in Bali as there are also 18 Malaysian Chinese students and 15 Malays who have no qualms at all over the predominantly Hindu culture here, says Bernama. 2. Politics and Security Supreme Court passes Death Sentence to Six of "Bali Nine" Four of the Bali Nine - journalistic shorthand for the nine young Australians convicted for trying to smuggle 8.2 kilograms of heroin through Bali's airport last year, suffered a massive set back before Indonesia's Supreme Court in early September when the number amongst the nine facing death before a firing squad increased from two to six. Appeals filed by both defense lawyers and prosecutors in the case, achieved the following results, reports balidiscovery.com: The death penalties for Andrew Chan, 21, and Myran Sukumaran, 25, marked as ringleaders were affirmed by the Supreme Court. The Indonesian Supreme Court Judges increased the standing sentence and imposed the death penalty for Scott Rush, 21, Tan Duc Thanh Nguyen, 23, Si Yi Chen, 21, and 19-year-old Matthew Norman. The death penalty was imposed by the Supreme Court countermanding a lower courts ruling last April that reduced their original life sentence of the four to 20 years. Michael Czugaj and Martin Stephens have had their life in jail sentence reaffirmed by the Supreme Court Ranae Lawrence, 28, the sole woman in the group who managed to have her life sentence reduced to 20 years on local appeal in Denpasar, saw her 20-year sentence allowed to stand reportedly due to cooperation she provided prosecutors and police in convicting her co-conspirators, reports balidicovery.com. According to Indonesia's judicial system, two options still remain open for appeal. Lawyers for those sentenced to death among the Bali Nine are expected to appeal to a special Indonesian court on constitutional law challenging the legality of the death sentence in Indonesia. While an appeal for Presidential clemency remains the last resort of the Australians sitting on death row. However, this avenue remains narrowed by President Yudhoyono's steadfast refusal so far to consider mercy for any convicted drug smuggler. In the latest development, Kompas (13 September) reports that in a special interview with three Indonesian journalists from Kompas, Suara Pembaruan and SCTV in Canberra, Australian Foreign Minister, Alexander Downer stated that Australia is in principle against the death penalty. Nonetheless, in the case of the Bali Nine, the Australian government supports the heaviest possible sentence, since these criminals are fully aware of the risks they are taking. Therefore, when the entire process is completed, Australia will support an appeal to reduce the death sentence. "At the right moment, - not now - we will support a reduction of sentence from the death penalty to jail sentence. However, now is not yet the right moment" Downer said, as reported by the Kompas daily. 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